NVCR - NovoCure At 5 Year Lows: Avoid Or Opportunity?

2023-07-25 17:09:58 ET

Summary

• In early June, NovoCure's stock dropped 43% in a single day after the company presented the LUNAR study at ASCO. The stock now trades near 5-year lows.
• What caused the drop exactly? And is this the end of the story for NovoCure?
• The details of the results and the implications of the details for investors will be discussed.
• Is this thesis-breaking or a buying opportunity? In other words, is this a Buy-Hold or Sell?

Introduction

NovoCure's ( NVCR ) stock trades near 5-year lows after a one-day drop of 43% after the company presented more details about the LUNAR study at the ASCO conference.

What's going on here? Is the NovoCure thesis broken?

For context and for those who don't know NovoCure yet, the company has developed TTFs or tumor-treating fields. Next to surgery, chemotherapy and radiation, new treatments are found and TTFs are one new form.

TTFs are delivered through portable devices close to the tumor. Low-intensity, intermediate-frequency electric fields are used to interfere with the cancer cell's ability to replicate, which slows down the tumor growth. TTFs can extend the lives of patients with some of the worst cancers, like glioblastoma and mesothelioma.

The LUNAR Study

The LUNAR study researches the use of NovoCure's TTFs for non-small cell lung cancer or NSCLC as a second-line treatment. A second-line treatment is given when the initial treatment doesn't work or stops working. It's often the first step for getting approval for first-line treatments. It's important to note that NovoCure is always an additional treatment. It doesn't replace another treatment.

In this case, NovoCure was tested together with the standard-of-care therapies in patients with stage 4 non-small cell lung cancer. The patients had platinum-based therapy or had finished that therapy. A part of the problem is already that 'standard-of-care' part. More about this later.

This is the title of the press release that NovoCure issued:

That looks very positive, doesn't it? And still, the stock tanked 43%. Why? To know more, we have to look at more details.

The Primary Endpoint

Studies always have a primary endpoint and other data. The primary endpoint is what the company wants to prove and it's essential for FDA approval.

If you look at the results of the primary endpoint, which was referred to in the title of the press release, the LUNAR study was successful, but maybe not as successful as many expected. NSCLC patients with the standard-of-care ('SOC') treatment achieved an Overall Survival ('OS') of 9.9 months, while patients with SOC and TTFs had an OS of 13.2 months. That means 3.3 months extra on average.

Many analysts had expected OS with TTFs to go up 5 to even 7 months, so this is somewhat of a disappointment. It's still probable, though, that the FDA will approve TTFs for second-line treatment of metastatic NSCLC, but it appears the market seriously doubts the commercial viability of TTFs with these results. Or put differently: the market doesn't know if doctors will recommend patients to use TTFs for a life extension of three months.

TTFs proved again there were no severe side effects and that could be an important element. The only side effects shown were rash and skin irritation, both from sweating and from very light burn symptoms from the micro electricity.

Now, if you ask patients if they want to use this, I think a substantial part would. After all, 3 months extra on average with your dearly beloved can make a difference, especially if you know that besides some rash there are no known side effects. Many cite the fact that you have to wear the device for at least 22 hours a day as something very negative and indeed, for some patients, it may not be worth it.

But the market is now afraid that many doctors will not even present this opportunity to patients. After all, the costs are substantial, although less so than many other cancer treatments. It may sound cynical to think of 3 months of extra survival in terms of money, but that is one of the elements inherent to the job of a doctor.

The TTF + ICI Combination Is Very Promising

Next to the primary endpoint, other data were released as well. The combination of TTFs and ICIs deserves attention. Immune checkpoint inhibitors or ICIs are defined as follows by the National Cancer Institute :

A type of drug that blocks proteins called checkpoints that are made by some types of immune system cells, such as T cells, and some cancer cells. These checkpoints help keep immune responses from being too strong and sometimes can keep T cells from killing cancer cells.

NovoCure's TTFs were tested with ICIs in the LUNAR study as well. The most well-known ICIs are Merck's ( MRK ) Keytruda and Bristol Myers Squibb's ( BMY ) OPDIVO. Just to show you how important these are, Keytruda is a top-3 drug when it comes to revenue, with sales of $22 billion in 2022. You can add an additional $8.5 billion for OPDIVO.

These are the results of TTFs in combination with ICI, from NovoCure's press release:

Tumor Treating Fields therapy together with immune checkpoint inhibitors resulted in an unprecedented 8-month improvement in median overall survival

NovoCure is not exaggerating here in my view: this is a spectacular result, showing again that TTFs are powerful as an additional treatment. That sounds great, right?

But there is a big problem. Immune checkpoint inhibitors are fairly new. When the LUNAR study started, they too were second-line treatments. But during the study, they moved up to standard-of-care first-line treatments.

This arm of the LUNAR study was for second-line treatment and while the results in combination with ICIs are impressive, the TTFs will not be approved for first-line treatment because of the results. Again, this limits the commercial potential of TTFs in NSCLC.

Now, it's probable that NovoCure will get approval for TTFs in second-line treatment for NSCLC, and from there, it can move on to apply for first-line use of its TTFs for NSCLC in combination with ICIs. Considering these results, there is significant potential there. With these results, you could even make a case that NovoCure's TTFs should be part of the standard of care for patients with stage 4 NSCLC. But the problem is that NovoCure needs a whole new study for that. Estimated time: 5 years, plus or minus a year.

Many investors are not prepared to wait that long and there is no guarantee the standard-of-care doesn't change again in the next 5 years. Of course, as ICIs are pretty recent as a standard-of-care first-line treatment, that chance is much lower than with this LUNAR study.

One potential solution for this problem is that people that didn't react to ICIs could be rechecked with ICIs in combination with TTFs and that could be seen as second-line treatment, but I'm not sure if that is wishful thinking or a real possibility. But there is not much else that is an alternative post-ICIs in the second-line treatment landscape, so that could play to NovoCure's advantage, especially as TTFs add no toxicity whatsoever.

NovoCure said at the ASCO presentation it would launch three new LUNAR studies to test TTFs in different conditions with ICI. Considering the strong results in combination with ICI, these studies could bring additional value to the company.

TTFs And Docetaxel

The TTFs were also tested in combination with docetaxel, a powerful chemotherapy used for NSCLC. Powerful here is not used positively, but in the sense that it has a heavy impact on patients' general feeling of well-being. In other words, there are many severe side effects. The results of TTFs with docetaxel were rather poor, with just 2.4 additional months of overall survival, 11.1 versus 8.7. This is probably another element that scares the markets. Let me explain.

Right now, most NSCLC patients will be treated with ICIs as standard-of-care, so this has two implications. The first is that docetaxel, a powerful chemotherapy with many side effects, will often be preserved for second-line treatment. The combination with TTFs doesn't work very well, as the results show, and as this study was only for second-line approval, this is negative for NovoCure.

But many may also be afraid now of the risk of the other indications that NovoCure has in its pipeline. Before the end of 2024, several other results are expected and these treatments are also predominantly in combination with chemotherapy. Analysts and investors probably worry that TTFs are just less effective with chemotherapy overall. It's worth pointing out that the other indications are not in combination with docetaxel, though. But the question is raised if chemotherapy reduces the effects of TTFs overall. Let's examine that further in the next part of this article.

Thesis busted?

What does this mean for the NovoCure investment thesis? It depends on your time horizon.

First, the money. With three approvals and almost $1 billion in the bank, I don't see NovoCure having to raise money anytime soon or even ever again. While NovoCure might look like a money-losing company from a GAAP operating income perspective, if you look at free cash flow, you see that the company could add $164 million to its balance sheet over the trailing twelve months. For a company in experimental therapies, this remains an exceptionally strong position to be in.

The company's pipeline also remains very promising with 12 other indications.

I do understand the market's reaction. The impressive results with ICI are maybe useless for the next several years as ICIs moved from second-line treatments to standard-of-care. That's not something NovoCure had much control over.

At the same time, the weak results with the chemotherapy makes investors doubt the rest of the data that will be announced over the next 1.5 years. Of course, not all chemotherapy is the same, but I understand the worries.

The only counterargument I can give, but a strong one in my opinion, is that the approved indications of TTFs in GMB and mesothelioma are also in combination with chemotherapy. The first results for the other indications also don't really show that chemotherapy and TTFs don't combine well. This could mean two things: either TTFs and docetaxel don't combine well or the treatment time is critical. As the overall survival of patients treated with ICIs is longer than those treated with docetaxel, they received longer treatment with TTFs. In GBM and mesothelioma, the treatment is also longer.

The impact for the results for TTFs used for ovarian cancer, expected to be announced later this year, could be better, as the overall survival is longer than in NSCLC.

The LUNAR study was (and will be) very important for NovoCure because it is by far the biggest market it can target. Until 2019, NovoCure used this in its presentations to show the addressable markets. As you can see, NSCLC is by far the biggest (in orange).

So, this is definitely a setback for NovoCure. Because of the unfortunate outcome of quite weak results on a more common second-line treatment and very strong results on a standard-of-care treatment that is now out of NovoCure's reach for at least several years. As a result, the immediate value of the company understandably drops. But the question remains if that 43% drop is an overreaction or not.

Is it a buy or a sell?

As it often is, this is a difficult question to answer, as it is a personal one that everyone should think about for themselves. I will share my thoughts and the elements that are important to me so that you can make your own informed choice.

First, I still see a big upside in NovoCure, especially after the stock price is cut in half. With a market cap of $4 billion now, almost $1 billion in cash and a promising pipeline, the stock looks more attractive.

At the same time, the stock has become riskier as well. NSCLC is the biggest market NovoCure is chasing and there is a significant setback there. The contribution to the company's revenue will probably be low, except if doctors would revisit failed ICI treatments with ICI+TTFs, but I'm not sure how likely that is.

The great results of ICIs + TTFs in NSCLC are very promising for first-line treatment of severe cases, but that use case is still years out and much could happen over that time. As you know, most investors want profits now, not in the distant future.

With three study outcomes expected in the next 18 months, I think there are enough reasons to hold NovoCure. The risks have increased as these results are now made much more important but the market has immediately adapted to that higher risk by cutting NovoCure's stock price by 43%.

One analyst from Truist came out with a post-presentation update and he kept NovoCure as a buy with a target price of $95. I think this is attainable on the condition that the company aces the trial results over the next 18 months.

So, there are short-term and long-term reasons why NovoCure at this price may be a bargain. At the same time, if the results of the studies that are announced over the next 18 months are bad, the stock could be treated similarly as it was yesterday. This makes NovoCure much more speculative than if the LUNAR results had been great.

All things pointed to good results in the LUNAR studies and the same can be said for ovarian cancer, brain metastases for NSCLC and pancreatic cancer, the results that will be announced over the next 18 months.

With the LUNAR results, NovoCure has bad luck that the great results with ICI are probably not commercially valuable, unless patients who didn't react to ICI previously are revisited for a combination therapy of ICI and TTFs. That's possible.

You can view this as positive or negative. The negative side is for sure that the big potential commercial success of NovoCure is postponed; the positive is that up to now, NovoCure's TTFs have not failed completely in any study. While the results in NSCLC with docetaxel are underwhelming, there is still a 2.4-month extra overall survival.

The question about buying, selling or holding should also be answered considering your current position in the stock. If you have no position, it could make sense to start a speculative position at this point, with several expected inclination points in the near future and more over the long term. If you already have a substantial position, I wouldn't add too much additional risk to your portfolio.

In the meantime, keep growing!

For further details see: